Tuesday, January 20, 2015

Will GST cause property prices to increase?

In less than 3 months time, GST will be introduced. The government is trying to make us think residential property prices will not increase because of this. In fact, they said the supply and demand of residential properties will have more effect on the price rather than GST. That is, developers and sellers will not increase prices, or even reduce prices in order to attract buyers. The government is not wrong about this... except that they are only telling you what you want to hear.

Take for example, this FAQ section in the Ministry of Finance's website.   

A frequently asked question:

Residential house is an exempt supply. The price will increase when GST is implemented as input tax cannot be claimed by property developer. How is it possible to convince the rakyat that the price will not be increased substatially because of GST

And if you read the reply from the MOF, you'd probably feel they think you are stupid - because they are not answering the question. 

The treatment to exempt residential house is to reduce the burden of rakyat because house is a basic necessity to the rakyat. The treatment also complements the Government’s initiatives to build more affordable houses for those who qualify especially the lower income group. This will give a minimum effect  compared to a situation where GST is charged at a standard rate on the residential house. The price of the residential house especially in big cities is very high where among the reasons is due to limited supply. As such, GST should not be used as an excuse for the price increase.

1st of all, a 6% GST is now imposed on all construction materials and services. While in the case of commercial properties where GST is imposed and developers can claim back the 6% tax, this is not the case for residential properties. Developers will naturally pass on this cost to the end victim - the buyers. 

But the government wants us to think that developers will instead absorb this cost because if they don't they won't sell anything. If this is indeed true, what about supply and demand? Post GST, investors will naturally turn to residential properties since they are "GST free". This will cause demand to turn towards residential properties. Investors will refrain from commercial properties such as offices, shops or serviced apartments (commercial titled residential strata) and buy residential properties. So residential-titled properties, if supply is low will definitely increase. Especially those in high demand areas like Subang Jaya, PJ, Cheras etc.

In a normal demand & supply scenario, properties in good locations will always increase. GST will drive even more demand towards residential. So residential properties in good locations will see a steep climb. 

I know post-GST, the government will show examples of property prices stagnate or drop but these will probably be in low demand areas like Bukit Beruntung, Malay reserved land in Hulu Langat or Sungai Merab and so on. 

This blog is not interested in bad properties or low demand locations.

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